Select Committee on Foreign Affairs Second Joint Report

5  COLLABORATIVE DEFENCE MANUFACTURING

129. British arms export policy does not exist in a vacuum. Many defence manufacturing projects are carried out in more than one country: policy needs to take account of this, and define whose rules apply in collaborative projects. This section considers the British Government's policy response to such situations.

Incorporation

130. In our last Report,[159] we commented on new guidelines which the Foreign Secretary had recently announced would be taken into account in considering applications for a very particular category of export: equipment for export to a second country, to be incorporated into equipment being manufactured in that second country for onward export to a third country.[160] That Report quotes extensively from the Foreign Secretary's written answer, but it is worth restating the guidelines themselves:

The Government will continue to assess such applications on a case by case basis against the Consolidated Criteria, while at the same time having regard to, inter alia, the following factors:

(a) the export control policies and effectiveness of the export control system of the incorporating country;

(b) the importance of the UK's defence and security relationship with the incorporating country;

(c) the materiality and significance of the UK­origin goods in relation to the goods into which they are to be incorporated, and in relation to any end­use of the finished products which might give rise to concern;

(d) the ease with which the UK­origin goods, or significant parts of them, could be removed from the goods into which they are to be incorporated; and

(e) the standing of the entity to which the goods are to be exported.[161]

131. The Government replied to our Report in October 2002,[162] but the evidence session on 27 February 2003 was our first opportunity to question the Foreign Secretary in person on these new guidelines.

132. The guidelines seem to have been introduced in response to a specific licence application, for the export of Head-Up Display (HUD) Units to the USA for incorporation into F-16 aircraft for onward export to Israel.[163] According to a letter from the FCO to the Committee of 21 March 2002, "the UK has not licensed for export main equipment such as tanks, aircraft, warships or artillery to Israel since May 1997", and British policy is not to approve licence applications for equipment which is at risk of being used by the Israeli Defence Force in the Occupied Territories. A HUD is a display of flight, navigation, attack, or other information superimposed upon the pilot's forward field of view. While not directly aggressive in nature, it greatly facilitates targeting by fighter aircraft. Presumably, under the Government's guidelines, the application for HUDs would not have been approved if the licence sought had been for export direct to Israel.

133. One of the concerns that we raised in our last Report was the question of whether the Foreign Secretary's new guidelines were compatible with the existing Consolidated Criteria.[164] The Foreign Secretary has now made it clear that in his view, the new guidelines are a "gloss on the criteria", rather than a departure from them:

I came to the view in the end that I did not need to change the criteria but I did need to make public how I was going to interpret those criteria … I could have simply said, if having judged that other things being equal within the criteria, we should license this application rather than not and to say we did it within Criterion 7 and leave it at that, but I thought it better to be explicit about the principles involved because that seemed to me to be a new circumstance because of the changing nature of the defence industry, and therefore required a new statement.[165]

Essentially, the Foreign Secretary's argument is that the guidelines were announced for the sake of transparency, not because of any change of policy.

134. It is at least arguable that the guidelines fall within the scope of the criteria. However, as a gloss on the criteria, they are presumably intended to make the Government's interpretation of the criteria easier to understand. It is by no means clear that they succeed in doing so. Moreover, they appear to have unintended implications for policy more widely.

Transparency

135. There is little doubt about the general intent of the guidelines: the Government will approve some licences for the export of military goods for end-use in particular destinations (such as Israel) if they are to be incorporated in a second country, which it would not approve if they were for export direct to those destinations. But this emerges from the context of the Government's announcement, the fact that it has licensed HUDs for eventual export to Israel, rather than from the announcement itself.

136. We are unconvinced that the Government's new guidelines will help exporters to assess whether a particular proposed export will be likely to receive a licence. For all its crudeness, the guideline issued by another EU member state that it will issue licences in all incorporation cases where the value of the components for export are "less than 20 per cent of final product" has the notable advantage that it leaves exporters and others outside Government knowing exactly where they stand.[166] While we applaud the principle of transparency which led the Government to issue guidelines on incorporation in July 2002, we conclude that the guidelines themselves do little to increase the ability of those outside Government to predict whether particular licence applications are likely to be approved.

137. One of the uncertainties about the new guidelines regards additional factor (c): "the materiality and significance of the UK­origin goods in relation to the goods into which they are to be incorporated, and in relation to any end­use of the finished products which might give rise to concern". There is no clear indication from the guidelines themselves whether UK-origin goods are more or less likely to be permitted for export if they are more or less material or significant in relation to the goods in which they are to be incorporated. An insignificant component, a motor part, for example, might well be considered of little relation to any end-use of concern, and therefore more likely to be licensed. A component might also be more likely to be permitted for export if it is more significant, because, for example, of the impact that refusing the licence might have on the defence relationship between the United Kingdom and the incorporating country. We recommend that the Government clarify whether UK-origin goods in incorporation cases are more likely to be licensed for export if they are more material and significant to the goods in which they are to be incorporated, or if they are less material and significant to these goods.

138. Evidence from Sibylle Bauer, who has conducted research on transparency in export controls across the EU, has pointed out the importance of transparent reporting on incorporation cases:

indirect exports have largely been ignored in parliamentary and public scrutiny, partly because of the lack of transparency. No country currently reports explicitly on indirect exports, although a sufficient level of detail about direct exports can permit conclusions about the final destination … Export figures are … considerably distorted if indirect exports are not considered.[167]

139. The Government has given out conflicting messages about how it will identify licences which have been granted under the additional considerations for incorporation cases in future Annual Reports on Strategic Export Controls. In our last Report, we recommended that "the Government's Annual Report for 2002 identify the number, destination and types of goods covered by licences where, in decisions to allow the export, the additional factors announced on 8 July played a part".[168] The Government's response, in October 2002, was positive:

The Government accepts the basis of the Quadripartite Committee's recommendation, and intends to publish in future Annual Reports information on cases where incorporation is involved. However, given that the Foreign Secretary's statement on incorporation is very recent, the Government is currently considering what additional data might be required and how that data might be collected and presented in the Annual Report. Whilst every effort will be made to ensure that this is done quickly, the Committee will recognise that it will take some time for this data to feed through into the reports themselves.[169]

We recommend that the Government should set out in its response to this Report the results of its consideration of how to present information on incorporation cases in future Annual Reports.

140. However, the Government's response to us appears to be contradicted by a previous written answer:

export licences approved or refused on the basis of the [incorporation] factors … will not be highlighted as such in the annual reports. Nor does the Government intend to provide in the reports information as to end-use and ultimate destination of finished products produced overseas incorporating UK components.[170]

141. We accept that the Government does not currently provide information on the end use of licences in its Annual Reports: there is no obvious reason why it should supply such information only in relation to incorporation cases. It is impossible, however, to assess how the Government is applying its criteria in relation to an incorporation case without knowing: first, that a particular licence relates to an incorporation case; and, second, the ultimate destination of the finished product. To state in an Annual Report, in the case of the HUDs to Israel, merely that the HUDs had been permitted for export to the United States, would be utterly inadequate information.

142. We recommend that the Government should identify in future Annual Reports those licences for which the additional factors of 8 July 2002 were a consideration. The final destination of the equipment licensed for export should be identified in such cases as well as the incorporating country.

Policy implications

143. The licence for HUDs for onward export to Israel is also problematic in policy terms. An export to Israel which transits the USA is more likely to be used for internal repression than an export direct from the United Kingdom. Israel has given assurances that equipment exported from the United Kingdom will not be used aggressively in the Occupied Territories. There has been a breach of these assurances, and the Government has announced that, as a result, it will no longer be taking the assurances into account when assessing licence applications.[171] But the assurances, however flawed, still stand—except, as we have learnt from the Government, that they do not apply to incorporation cases.[172] We recommend that the Government explain in its response to this Report why it did not seek to ensure that Israeli assurances—that British exports of military equipment direct to Israel would not be used aggressively in the Occupied Territories—did not also apply to components permitted for export to Israel via the United States.

144. Were the Government to license the export of HUDs to Israel direct from the United Kingdom, it would have the assurance, however unreliable, that they would not be used aggressively in the Occupied Territories. Its current policy is not to license such exports. It is, however, prepared to license for export to the United States HUDs which it knows are for eventual use in Israel, where it has no assurance that the equipment in question will not be used aggressively in the Occupied Territories.

145. Evidently, the licence for the export of HUDs to the United States was granted on the basis of other considerations than the risk of aggressive use in the Occupied Territories. The Government has clearly come to the conclusion that the threat to the defence relationship between the United Kingdom and United States that would be caused by refusing this particular licence for HUDs outweighs the risk that the equipment in question will be used for internal repression:

what it means is if in the case of our largest defence contractor BAES they have a huge long-term relationship with defence industries in the United States, then no sensible government can ignore the implications for that relationship of decisions on one individual application. That does not mean that you automatically go along with the application, but it does mean you need to take account of it.[173]

146. We stated in our last Report that "we recognise [the need to address] the challenge faced by the UK defence manufacturing industry in securing participation in and sustaining collaborative procurement projects, particularly those involving the USA".[174] It is a particularly sensitive and difficult task for the Government to seek to balance the country's defence interests generally against the risk that particular equipment will be used for internal repression or international aggression. But we conclude that it is hard to comprehend the ethical basis for a policy which allows the export of certain military goods for end-use in Israel only via the United States with no assurance that they will not be used aggressively in the Occupied Territories.

147. It is also instructive to consider how the policy on the export of components incorporated abroad into main equipment will affect the supply of spares for these parts. If the end-user requires spare parts which are manufactured in the United Kingdom, the Government might find itself in a position in which its criteria only allow it to license such parts if they are incorporated into the end product in a second country. Taking the HUDs as an example—and ignoring for a moment the practical considerations that may apply to their installation and repair—the British Government would not, under its own rules, license the export of spare HUDs direct to Israel for incorporation to take place in Israel. Nor would it license the export of spare HUDs to the United States for onward export to Israel and incorporation in Israel. If, on the other hand, the Israeli authorities transported their aircraft to the USA, the British Government presumably would license the export of spare HUDs to the USA for incorporation into the aircraft there prior to onward export back to Israel. This is an absurd outcome of a policy introduced for sensible reasons.

148. In practice, the Government might well recognise this absurdity and permit the export of spare HUDs direct to Israel. It might also face legal challenge if it refused to supply spares for equipment that it had allowed to be exported in the first place. But this would only further undermine the Government's policy not to export such goods to Israel. We conclude that the new policy on incorporation cases risks undermining other aspects of export policy. We recommend that the Government explain in its response to this Report how it will treat licence applications for the export of spare parts to the end user direct, or indirect but unincorporated, where the original licence was granted for incorporation in one country prior to onward export to an end user in another country.

The international policy dimension

149. We have also tried to discover whether there is a common EU-wide policy on incorporation.[175] From our questioning of the Foreign Secretary, it has emerged that there is no such common policy,[176] and that, even for the Government, it has proved "quite difficult to unearth other countries' practices".[177] This gives rise to concerns about undercutting within the EU. If countries within the EU have different criteria for considering incorporation cases, it is inevitable that some components will be allowed for export which other countries would refuse. A refusal by an EU member state would trigger a denial notice, informing other member states that a licence application had been refused, but if a supplier knows in advance how different countries apply the criteria, it can avoid denial notices by seeking licences only in countries where the likelihood of such licences being granted is high.

150. We remain concerned that national and EU export control policies may be eroded by the new guidelines on incorporation cases. It is true that the guidelines make clear that the "export control policies and effectiveness of the export control system of the incorporating country" are to be taken into account. This would allow an incorporation licence to be refused if the incorporating country had a lax export control system, or if its export control policies were unacceptable to the British Government. The United States has an effective export control system, and export control policies with similar aims to those of the United Kingdom.

151. The United States does not, however, apply its policies in the same way as the United Kingdom. The United States permits, as a matter of policy, the export to Israel of military goods which the United Kingdom would not be prepared to license. Because of the importance of the defence relationship between the United States and United Kingdom, British policy (not to export HUDs to Israel) has in this case effectively been subordinated to US policy (to export such goods).

152. In our last Report, we concluded "that the Government's announcement of 8 July has made it more urgent that efforts be redoubled to seek to secure harmonisation of EU and US policies on arms exports".[178] The Government's response to this conclusion failed to address this concern:

The UK continues to engage fully with EU Partners, with the USA and with other key arms exporting states, through multilateral fora, such as the EU Code of Conduct on Arms Exports and the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, and on a bilateral basis, in order to secure the widest possible acceptance for responsible and practical arms export controls.[179]

153. While we are fully supportive of the Government's engagement in these valuable fora, the problems raised by incorporation cases cannot be solved by "responsible and practical arms export controls" alone, where these controls are applied very differently by different countries. We recommend that the Government set out in its response to this Report the steps that it is taking to harmonise the policies of countries which have responsible and practical arms export controls (such as the United Kingdom and United States) on the export of defence equipment to third countries (such as Israel), particularly in cases of collaborative defence manufacture.

Incorporation: Conclusion

154. On incorporation, we conclude that the export of components in collaborative defence manufacturing projects only involves a different balance of considerations from other defence exports because different countries operate different licensing regimes. When considering the question of the export of Head-Up Displays to Israel via the United States, the Government faced a dilemma: it could allow the export and risk undermining national policy, or it could refuse the export and risk undermining the United Kingdom's defence relationship with the United States. The Government was right to attempt to find a solution to this dilemma, and right to be open about its position. But, as we have shown, the Government's solution raises as many issues as it addresses. In our view, it also had a third choice: it could have allowed the export, but attached conditions to its end use. The United States regularly imposes end-use conditions on its defence exports; it does not seem unreasonable that the British Government should do the same.

US Controls on Imports (ITAR)

155. The USA's International Trade in Arms Regulations (ITAR) currently constitute an unfair barrier to British industry's engagement in the US market. Negotiations began in July 2000 on a potential British ITAR waiver. This would permit the transfer without a US export licence of most unclassified defence items, technology, and services to the British Government and qualified companies in the United Kingdom. In the Government's view a waiver "would make a significant contribution to transatlantic defence industry co-operation and promote Alliance interoperability. At the same time it would ensure that comparable export controls were maintained on US and UK defence items".[180] We concluded in our last Report that the conclusion of negotiations on an ITAR waiver was "a matter of urgency" and "vital to ensuring that the UK defence manufacturing industry is operating in a fair international environment".[181]

156. According to the Government, progress was made during 2002 on the negotiation of an ITAR waiver, but "a number of complex issues" remain to be resolved, including "differences to achieving the same non-proliferation and export control objectives within the legislative framework of the two negotiating partners".[182] Differences between US and British policies on incorporation cases are one of the matters still under negotiation. The US, for example, "does not have publicly announced incorporation criteria."[183]

157. Negotiations with Australia on an ITAR waiver have now been completed. There have been unconfirmed reports in the specialist press that negotiations on a UK waiver will follow shortly, with an agreement to be in place by 2004.[184] We hope that reports are accurate that agreement is imminent on a British waiver from the International Trade in Arms Regulations. We recommend that the 2002 Annual Report should include a progress report on negotiations towards this waiver.

Global Project Licences

158. We commented in our last Report on the reporting implications of the Six-Nation Framework Agreement on European Defence Industrial Restructuring.[185] The agreement has created a new instrument, the Global Project Licence (GPL), which will be used to permit the export of the end product of collaborative programmes by any of the partners[186] to any country on a list of permitted destinations. This means that UK-manufactured products could be exported from any of the other five partner countries without this being recorded in UK Annual Reports. In its response to our last Report, the Government stated that:

The Government gave assurances in the 2001 and 2000 Annual Reports on Strategic Export Controls that Global Project Licences will be included in future editions of the Report. We estimate that such licences will be reported for the first time in the 2003 Annual Report.[187]

159. We asked the Government in writing whether any further thought had been given to how Global Project Licences would be reported in future Annual Reports. The Government has told us that they "expect that Global Project Licences will be reported in a similar manner in which we report on OIELs in the Annual Report. There will be an equivalent level of transparency". We note also that "it is anticipated that a GPL will be issued in the near future".[188]

160. When the Government reports on OIELs, it publishes the broad categories of equipment permitted for export and the destinations to which the export is permitted. This allows the public to see that the Government is prepared to license the export under open licences of, for example, components for combat aircraft to India. Publishing equivalent information on Global Project Licences would not necessarily reveal this fact, because the initial destinations of components under the licences will be other partner countries. If these components were manufactured into finished aircraft in Italy, for example, for onward export to India, the British Government's Annual Report might reveal only that aircraft components were permitted for export to Italy under a Global Project Licence. This would in fact be notably less transparent than the information currently provided on OIELs in the Government's Annual Reports.

161. During our inquiry on the 2000 Annual Report the Government wrote to tell us that lists of permitted export destinations for products jointly produced by the Agreement signatories will be classified as commercial in confidence because "they could alert international competitors to market opportunities".[189] Only companies and partner countries involved in the particular projects will have access to the relevant lists.

162. The obvious question is why information about the permitted destinations for products manufactured under Global Project Licences is more sensitive than information about the permitted destinations of exports under SIELs and OIELs—which the Government is prepared to publish. It could be argued that information published in current Annual Reports on OIELs also alerts international competitors to market opportunities.

163. One possible difference between Global Project Licences and other types of licence is that the latter are generally granted when the export is ready or nearly ready to take place. Global Project Licences, on the other hand, will be granted before manufacturing has even started. What this suggests is that the list of permitted destinations under a Global Project Licence might reasonably be withheld, but that once an agreement has been reached to supply a destination with equipment produced under such a licence, this destination should be published. This would provide an equivalent level of transparency to that provided about other types of licence. We recommend that, as a minimum, information should be published in future Annual Reports showing that a country is a permitted destination under a Global Project Licence as soon as the Government is aware that agreement has been reached with an end-user in that country for supply of equipment produced under such a licence.

164. We are reassured by the Government's comments in the 2001 Annual Report that:

For individual collaborative projects permitted export destinations for exports of finished products would be agreed by the authorities of the participating countries in a particular project. These would be based on the destinations proposed by industry where they believe there are likely prospects for exports of the finished products. The treaty makes clear that where circumstances have changed significantly for the worse, a permitted export destination could be removed. In the majority of such cases, it is unlikely that EU (and therefore Framework Agreement) countries' policies on military exports to that destination would differ. If, however, consensus is not possible, and if even one participating state objects to a proposed export destination, the treaty states that caution would prevail and the destination would be removed.[190]

We note that the Government has the power under the Six Nation Framework Agreement to refuse unilaterally to allow the export to a particular destination of equipment produced collaboratively under the agreement. We conclude that this element of the agreement is essential to secure public confidence in the continuing robustness of strategic export controls.

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159   HC (2001-02) 718, paras 136-147 Back

160   For the sake of succinctness, we will refer to such cases as "incorporation" cases in this Report -even though this terminology may not strictly speaking be accurate. Back

161   HC Deb 8 July 2002, cols 650W-652W Back

162   Cm 5629 Back

163   Ev 5, Q 21 Back

164   HC (2001-02) 718, para 144 Back

165   Ev 6, Qq 22-24 Back

166   Ev 7, Q 28 Back

167   Ev 47 Back

168   HC (2001-02) 718, para 146 Back

169   Cm 5629, p 13 Back

170   HC Deb 17 July 2002, Col 385W Back

171   HC (2001-02) 718, Ev 48 Back

172   HC Deb 28 February 2003, Col 64WS Back

173   Ev 7, Q 28 Back

174   HC (2001-02) 718, para 145 Back

175   Ibid, para 144 Back

176   Ev 6-7, Qq 24 and 28 Back

177   Ev 6, Q 24 Back

178   HC (2001-02) 718, para 143 Back

179   Cm 5629, p 12 Back

180   2001 Annual Report, p 7 Back

181   HC (2001-02) 718, para 77 Back

182   Ev 33 Back

183   Ev 48 Back

184   National Defense, April 2003 Back

185   HC (2001-02) 718, paras 81-83 Back

186   France, Germany, Italy, Spain, Sweden, and the UK Back

187   Cm 5629, p 5 Back

188   Ev 34 Back

189   HC (2001-02) 718, Ev 45 Back

190   2001 Annual Report, p 6 Back

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Prepared 20 May 2003